Bad press but great returns
Like any stock portfolio, private equity funds are a collection of investment stories. A few may become famous, but most either earn money or lose it outside the public spotlight.
The last private equity fund fully invested by Thomas H. Lee Partners is no exception, a cash pool of $6.1 billion first raised in 2000 and ultimately sunk into 23 companies. One of those investments, the fund's stake in the infamously bankrupt brokerage Refco Inc. , attracted public attention like a magnet. The eventual tally on Lee's interest in Refco depends on the results of litigation, but its $450 million investment is carried on the fund's books at a loss of nearly $170 million today.
The rest of the Lee fund, which receives much less attention, is a very different story. A long list of solidly profitable and occasionally spectacular investments in the portfolio has lifted its return to limited partners over 28 percent, after fees on an annualized basis, according to investors familiar with the fund.
Cambridge Associates, a financial research fund in Boston, reports the median return for 68 US private equity funds of the same vintage year at 13.2 percent annually. Returns for the top quarter of that field start at 21.9 percent.
Over those same years, the public stock market has more or less broken even.
The Lee fund launched in 2000, formally known as Thomas H. Lee Equity Partners V, has been especially important to the private equity firm as a transition vehicle for its management. Founder Tom Lee continued to play some role, though diminished, for the last time in the management of the fund.
A new Lee Partners fund, which recently raised $4 billion and will eventually collect up to $9 billion from investors, is being led by a new generation of managers with no involvement by Lee himself. Scott Sperling , Anthony DiNovi, and Scott Schoen , all longtime Lee deputies still in their 40s, are completely in charge now.
The outsized returns from the last Lee fund have been generated by investments in insurance, publishing, electronic media, consumer products, industrials, and pharmaceuticals. You would recognize a few companies in the portfolio, like Simmons Mattresses and publisher Houghton Mifflin . Others, like Progressive Moulding, are certifiably obscure.
Warner Music Group , an investment that seemed risky at the time, has become a big winner. The Lee fund long ago got all of its $655 million cash investment back and still owns public Warner Music stock worth nearly $1.7 billion.
Among the few disappointments in the Lee fund portfolio: American Media Inc. , publisher of the Star tabloid and a portfolio of magazines. The fund's $250 million investment is roughly breaking even.
Other investments have been sold out of the portfolio by now. Lee and JP Morgan Partners bought National Waterworks Inc. in 2002 and sold it to Home Depot Inc. three years later for about $1.3 billion including debt, generating a profit of about 350 percent in three years.
Several other companies in the fund portfolio have filed paperwork to go public in recent months. Allied World Assurance Holdings , a Bermuda insurance firm, launched its initial public offering this week. NTK Holdings of Providence, a maker of heating and air conditioning products, filed paperwork to go public in May. Drug company Warner Chilcott Ltd. filed IPO papers last month.
It will take several more years for Lee's 2000 fund to cash out all its holdings, and the firm's next fund has already invested in companies like Spanish-language broadcaster Univision Communications Inc. , Dutch media company VNU NV , ethanol producer Hawkeye Holdings Inc. , food vendor Aramark Corp., and telemarketer West Corp.
But Lee investors who committed their money six years ago have to like the way the investment story has turned out.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
